NEW YORK/LONDON, March 8 (Reuters) - The soaring cost of
ethanol credits for oil refiners is boosting gasoline prices and
could crimp fuel supplies, threatening to send U.S. pump prices
higher during the peak summer driving season, industry officials
and traders warned on Friday.

U.S. gasoline futures for April delivery in the New
York Harbor rose 2.5 percent to more than $3.20 a gallon on
Friday. Gasoline prices are up 12.1 percent since Feb. 28, even
as the price of U.S. crude oil has fallen 1.1 percent
. Traders attributed the divergence in part to a spike in
the price of renewable fuel credits, known as RINs (Renewable
Identification Numbers), to record highs this week.

According to a U.S. government mandate, producers of
petroleum-based fuels must blend increasing volumes of renewable
fuels, such as ethanol and biodiesel, into gasoline and diesel
fuel each year. In 2013, the mandate requires 13.8 billion
gallons of ethanol blending to generate the required RINs.
Failure to meet it - or cover any shortfall by purchasing RIN
credits in the secondary market - would result in large fines
for refiners.

The problem for refiners is that U.S. demand for gasoline
has fallen over the past half-decade, but the amount of ethanol
they must add to it is still rising.

Refiners say they face a Catch 22. If they blend more
ethanol into gasoline, they risk breaching levels deemed safe by
automakers and the U.S. Environmental Protection Agency for use
by older cars in the U.S. vehicle fleet. The refiners are
reluctant to go above 10 percent because of potential liability.

On the other hand, if they fail to reach government targets
for ethanol, they must buy the increasingly expensive credits.
The surging cost of RINS is translating into higher fuel prices.

Rising gasoline prices, already near a record for this time
of year, could prove a drag on the U.S. economy and particularly
hit low-end consumers. It could also heighten the debate in
Washington over whether the ambitious ethanol policy implemented
by former President George W. Bush is worth continuing.

The blending mandates, meant to curb dependence on foreign
oil and transition to cleaner fuels, were imposed when U.S. fuel
demand was still rising rapidly and domestic oil production was
falling sharply. Today, demand has slackened and U.S. oil output
is near an 18-year high.

The EPA "effectively sets an ethanol standard over 10
percent of gasoline demand. This could result in significant
fuel supply disruptions in the U.S.," said Kyle Isakower, a vice
president for oil industry group American Petroleum Institute,
in testimony delivered to the EPA on Friday.

While there is no shortage of ethanol, the API has urged
Congress to repeal the renewable fuel mandate.

RUN ON RINS?

The EPA said in its proposed 2013 renewable fuels standard
rules released on Feb. 7 that there should be enough RINs left
over from 2012 to satisfy demand in 2013. But it warned it was
likely there would be fewer RINs carried over into 2014, when
the overall renewable fuels requirement rises substantially.

Prices for 2013 ethanol RINs have tripled in the last three
weeks to 83 cents per gallon from 27.50, data from Argus Media
show. The certificates were going for a nickel apiece as
recently as October.

Refiners or blenders who have already met their bioethanol
quota can sell surplus RINs on the market as credits.

"The market has suddenly figured out there's a problem.
People will have to draw down stockpiles of RINs this year,"
said Patrick Westhoff, an economics professor at University of
Missouri and head of its Food and Agricultural Policy Research
Institute (FAPRI).

Westhoff estimated the tight market for RINs is currently
adding around 5 cents to 7 cents per gallon to wholesale U.S.
gasoline prices and that the premium could rise further.

EUROPEAN EXPORTS CURTAILED

According to other industry sources, the rise in RIN prices
might already be adding a 10 cent per gallon premium to U.S.
gasoline prices. Perhaps more importantly, it has discouraged
the United States from importing more gasoline from Europe
recently. U.S. importers must obtain blending credits or RINs
for the quantities they import.

"The RIN costs will have to be overcome in order to move
barrels to the U.S. That will be tricky for refiners," one
European fuel trader said. The U.S. East Coast, which includes
the New York Harbor delivery point for the domestic gasoline
futures contract, must import gasoline to help meet demand.

If the price of RINs rise further, Westhoff expects U.S.
refiners to start producing and selling more fuel known as E85,
which includes 85 percent ethanol, or E15, a 15 percent blend.
But refiners have so far balked at that.

"Refiners continue to do everything they can to get gasoline
marketers to not offer consumers E15. It is a classic
marketplace battle - a battle for the barrel," said Bob Dinneen,
president and CEO of the Renewable Fuels Association, which
advocates for ethanol makers.

Without blending more ethanol into finished gasoline - above
the average 10 percent level - a federal mandate will not be
met, Dinneen said. Gasoline prices would be much lower if
finished fuels were blended with more ethanol, he added.

Valero Corp, the largest independent U.S. refiner
and a net buyer of RINs, is reluctant to do that.

"One of the solutions is to pass the 10 percent level," said
Valero spokesman Bill Day.

While the U.S. Environmental Protection Agency has approved
use of 15 percent (ethanol) in some vehicles, Valero does not
want to sell a product that has not been warranted by the auto
industry, which has warned against using gasoline with more than
10 percent ethanol in cars made before 2001.

"So we can't sell E15. We're stuck in a position where we're
up against the blend wall. Across the country, just about every
location is now using ethanol at up to 10 percent," Day said.

Brokers and analysts said recent highs RINs prices have
closed the arbitrage window for gasoline imports from Europe.
Valero has been exporting up to 8 percent of its fuel to Latin
America. Exports do not have to include an ethanol blend.

Fewer imports and more U.S. fuel exports could lead to
tighter supply of U.S. gasoline during driving season.

Gasoline stocks in the United States are already below
year-ago levels, according to government data. Fuel blenders on
U.S. East Coast typically import around 200,000 barrels per day
from Europe, whose refiners churn out a surplus of the fuel.

Data shows that gasoline stocks at
Amsterdam-Rotterdam-Antwerp, the world's largest oil hub,
recently rose to a two-year high.

The value of conventional ethanol RINs during 2013-2014 is
expected to average 67 cents per gallon, up from an average 11
cents per gallon in 2012-2013, according to a report published
on Friday by FAPRI. The values are projected to be 70 cents or
more per gallon until at least 2023, the report shows.
(Additional reporting by Sabina Zawadzki, Cezary Podkul,
Matthew Robinson and Robert Gibbons in New York and Carey Gillam
in Kansas City. Editing by Andre Grenon)

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